Category: Auto

Closing the Gap When Your Car Is Worth Less Than You Owe

Posted on by steve hom

You probably know that the minute you drive your new car off the dealer’s lot, it loses a significant portion of its value.  If you intend to keep it for at least a couple of years, to get to that break-even point and then sell it, the loss of value may not bother you. 

That loss of value would bother you more, though, if the nearby river overflowed and your new car floated way with everything else that wasn’t bolted down.  You might still owe $20,000 on it.  However, your insurance carrier might cover it for current value and send you a check for only $14,000.  You would end up owing the bank or finance company $6,000 and have no car to show for it. 

Unfortunately, that’s not the worst news.  These days, the big discounts being offered for new car purchases are depressing the value of slightly used cars even more.   That means, in auto industry parlance, that new car buyers who finance their new cars are even more  ‘upside down’ than ever before.  Lately, the average gap between what a car is worth and what is owed on it is $2,200.

In addition to discounting widening the gap, other factors, too, are putting new car buyers in the financial hole.  One of these is the buyer’s tendency to look for longer terms and lower payments.  But the longer it takes to pay for the car, the longer it takes to reach the point at which you owe less than the car’s depreciating value.  Another is the finance industry’s desire to accommodate these buyers, not to mention gain more interest.  In California, some dealers are writing seven-year finance contracts.  (Many people recall when three-year loans were standard, four-year unusual and five-year unheard of. These days, five-year loans are common.)

Dan Kiley, reporting in USA Today, noted that Friendly Chevrolet in Dallas estimates that 90% of its customers are upside-down, often owing as much as $10,000 to $15,000 more than the car is worth at trade-in time.

Gap insurance can fix that.  Some gap insurance policies can also be worthwhile if you simply want to trade the car in during its ‘upside down’ period.

Dealers, becoming more aware of the problems these widening gaps can cause, are beginning to offer gap insurance, usually costing between $500 and $700.  But, some manufacturers, including Honda and Toyota, discount so infrequently that they find only 15% of their customers-versus 90% for some big discounters-are ‘upside down’ and may not offer gap insurance at the dealership. And, in any case, dealer gap insurance may not be as comprehensive as the gap insurance you can find through an agent.

If you finance through a bank or credit union rather than the dealer’s finance company, you probably will not be offered gap insurance, either.  In fact, you may not be able to purchase it through the bank or credit union at all.  Again, the best bet is to check with an agent, who can not only find you the best policy for your situation, but help you assess whether you need it, or would be better off directing those insurance dollars to a more immediate need. And it is likely to be more cost-effective than the insurance offered by the dealer. 

While the insurance product is most often referred to in the press and at dealerships as gap insurance, some companies, such as Progressive Insurance Company, call it loan/lease payoff coverage.  And there might be other names, but your agent will know the ones that apply to the products of companies he or she represents.

If you decide gap insurance is a good idea for your situation-and remember, you would otherwise be self-insuring for losses during the time when your car’s loan exceeded you car’s value-discuss gap insurance with your agent when you start looking for your new car.  You will want to ask your agent to investigate the instances in which a company’s gap coverage would not kick in, and how it would pay if it did.  Some policies pay replacement value for a totaled car, even if replacement value is thousands higher than when you bought the car.  Others pay only the total owed on the car.  And still others pay a percentage of the total owed, leaving you to self-insure for part of that gap.  Some companies also require that you place your collision and liability insurance with them as well, but you may well get a discount for ‘packaging’ all of it; your agent can help you through this

If you think gap insurance is just another little bill to pay, remember this essential fact: having it may make the difference between surviving the loss of a car in good shape, or in great distress.

What’s the Deal with State-Sponsored Auto Insurance?

Posted on by steve hom

Low-income drivers on both coasts can now get basic insurance directly from the insurance department of the state they live in-as long as that state is New Jersey or California.

Affordable, state-sponsored auto insurance could be good news for low-income drivers who need a car in the 45 states with stringent mandatory insurance rules, and a federal program for making such assistance available-the Auto Choice Reform Act-has been discussed since 1998.  At that time, the National Association of Independent Insurers (NAII) commissioned a study to determine the impact of affordable, state-sponsored insurance on the lives of low-income citizens.

The study found that, in 1991, U.S. households overall spent 2 percent of their annual income on car insurance. Low-income residents in Maricopa County, Arizona, spent up to 30 percent of their annual income on auto insurance.  But they had to have reliable private transportation to their jobs-as do most Americans-and often paid for car insurance while jeopardizing other necessary purchases.  This study found that 44.1% of respondents could not buy food at least once because that money had to be spent for car insurance.

In response to this information, California legislators made extension of the state’s mandatory insurance law contingent on developing a state-sponsored, affordable insurance program.  Naturally, the legislators expected it would be wildly popular, but experience has shown that only 4,000 drivers had taken advantage of it by 2003, for a number of reasons.

Among those reasons are:

 

  • The need to meet a tough financial eligibility rule.
  • For some, the cost-at approximately a dollar a day-was still too high.
  • Even a dollar a day was not low enough to cause already-covered, low-income drivers to switch; California’s bare-bones package offers no medical coverage to the policyholder, just to passengers.

 

In 2003, eligibility requirements and price were adjusted so that more drivers would qualify. The program now requires a policyholder’s annual income to be no more than 250 percent of the federal poverty level, or about $38,000 for a family of three. (The standard had originally been 150 percent.)

Liability coverage, at $10,000 for bodily injury to one person, is lower than the state’s minimum liability limits for private coverage, but insurance industry data show 90-percent of bodily injury claims are for less than $10,000.

The New Jersey plan, available for the first time in 2003, is slightly more extensive, paying up to $15,000 of most medical expenses due to an accident, and providing coverage for catastrophic injuries, such as severe brain damage, up to $250,000. Eligibility is based on standards for Medicaid. 

Acceptance of these policies by low-income drivers could be good news for all drivers in the states that have them.  For one thing, these policies eliminate the hassle that occurs in accidents with uninsured motorists.  This should make them attractive to the insurance industry as well as drivers.  For another, they would relieve an enormous amount of stress on low-income working families, and any stress reduction in U.S. society-particularly on the roads-would have to be a good thing.

Is there a downside for the insurance industry or for individual drivers? 

Not really, although the California program was begun partially in response to lobbying by insurance companies that wanted to impose a surcharge on drivers for temporarily dropping coverage or having been previously uninsured.  California’s legislators found that idea punitive and counterproductive.  But some states, Maryland for example, continue with very costly automatic uninsured driver coverage, and without an elective plan to cover those who have trouble paying market-priced insurance bills.  Maryland’s coverage kicks in the second a driver’s insurance lapses, regardless of the reason for the non-payment; forgetfulness, bank error, and/or poverty are equally penalized under the law.

A survey for the California Department of Insurance said that the poor want to comply with mandatory auto insurance laws.  It suggests developing a product that clearly and directly benefits the poor and is “affordable, such as an under-$300 policy that provides medical benefits and lost wage coverage.” 

That’s a small step for California…but a huge leap for states like Maryland and 42 more that have yet to consider organizing auto insurance assistance for the low-income drivers.

PIP and No-Fault-Is “Reform” the Wave of the Future?

Posted on by steve hom

More and more states are abandoning the PIP/No-Fault form of auto insurance in favor of a tort-based set of laws.  PIP/No Fault originated in the 1930s as an alternative to the often slow and expensive process of litigating claims.  The intent was to speed up the process by shifting the dispute resolution to the insurance companies rather than the courts.  In theory, this was supposed to reduce insurance rates, and initially rates did go down.  By the mid-70s, almost 20 states had some form of no-fault insurance laws.  However, over time, rates rose until “No-Fault” states had higher rates than tort-based states.  Beginning in 1980, states started repealing their no-fault laws, and now only nine states (Florida, Hawaii, Kansas, Massachusetts, Missouri, Minnesota, New York, North Dakota, and Utah) have mandatory no-fault laws. Eleven states plus the District of Columbia have hybrid laws (Arkansas, Delaware, Kentucky, Maryland, New Jersey, Oregon, South Carolina, South Dakota, Texas, and Virginia).

The pendulum seems to be swinging back to tort-based auto insurance. What does that mean for you as a policyholder?

The Good News

Tort-based systems, in theory, give you more choices for medical payments and could save you substantial amounts of money.  As an example, depending on the insurance company and coverages selected, insureds in Colorado (the most recent state to revert to a tort-based system) could see savings of 10%-30%, according to several recent Denver Post articles.

The Choices

PIP, or personal injury protection, is still available (in most cases), should you wish (or need) to pay for it.  If you choose to drop this coverage or are already under a tort-based system and don’t have this coverage, you can still purchase it, with most policies, for medical expenses.  However, this coverage will be limited, generally to no more than $50,000.  If the additional coverage is purchased, it will pay expenses incurred by you and your immediate family for injuries resulting from an auto accident when you or they are at fault.

Since many drivers are uninsured or underinsured, it is essential that you understand the ramifications and make an informed decision about the “Uninsured/Underinsured Motorists” coverage option.

What If?

What happens if you are at fault? Your auto policy should pay the other person’s claims.  Companies normally negotiate this with each other.  If you have insufficient coverage you may have to go to court—the tort aspect of the law. Either you or your health insurance company will normally pay medical expenses for you and your family once expenses exceed your auto policy coverages.

What if you are injured by another driver and that driver is at fault?  Generally the two auto insurance companies will work together to determine fault and pay benefits accordingly.  This resolves the problem in most cases.  If not, or if the amounts paid are insufficient, it may be necessary to resort to the court system to recover damages.

What if the other driver is at-fault and has no (or has inadequate) insurance?  Your insurance company normally covers your medical expenses.  This protection is provided under the uninsured/underinsured motorist coverage.  If you do not have this coverage, then your health insurance usually pays the bills, or you can sue the other party.  Which brings us to the final important considerations.

Consider the “Deductible Gap”

Generally, under a tort system, medical payments under your own policy are limited.  However, in most cases you can choose “additional medical payments” and “Uninsured/Underinsured Motorists” coverages as part of your auto insurance policy.  After years of rising rates, many people may choose to forgo any additional coverages.  This could be a problem if you have high-deductible health insurance, or no health insurance at all.  There is potentially a huge gap between the amount paid under a tort-based policy and your health insurance deductible.  If you have no insurance, the out-of-pocket costs could be staggering.  If you are not at fault in the accident, the tort-based system allows you to go to court to get compensated for these costs, as well as for pain and suffering, but there is a time factor and a lot of out-of pocket expenses involved.

What Does This Mean for Health Insurance Costs?

As more costs are shifted to the health insurance system, your costs are likely to rise.  Furthermore, not everyone has health insurance.

So, What Is Next?

This is a good time to look at your health insurance to make sure it covers you adequately if you drop PIP/No-Fault coverage.  It’s all about avoiding unpleasant surprises!

What’s the Deal With Generic Crash Parts?

Posted on by steve hom

If you were to hang around the inventory area of any major independent auto repair shop, you’d hear the statement, “Parts are parts.”  In short, generic, also called aftermarket, parts will be perfect clones of those from the automaker, or original equipment manufacturer (OEM).

The initial introduction of aftermarket parts undercut the OEM prices by 30 percent.  Even the Insurance Institute for Highway Safety believed that the only place it might matter whether a part was OEM or aftermarket was the hood.  So many insurers decided using aftermarket parts was one way to keep costs, and premiums, down.  Even so, the use of aftermarket parts reportedly never rose above 15 percent of the market, despite the efforts of the Certified Automobile Parts Association (CAPA).

CAPA was established in 1987, through the efforts of the Auto Body Parts Association (ABPA) in order to improve public confidence in aftermarket parts. Although CAPA gets significant funding from the insurance industry, collision repair experts also sit on the 14-member Board of Directors and provide substantive advice.

Despite all this, in recent years, several class action lawsuits have substantially eliminated the use of aftermarket crash parts.

The first major setback for aftermarket parts happened in 1999.  In the case of Avery vs. State Farm, a jury in southern Illinois found State Farm liable for $456 million in damages and an additional $730 million in punitive damages in a class action suit involving use of aftermarket auto parts.  The plaintiffs claimed State Farm Mutual Auto Insurance Co. had failed to tell policyholders about the use of aftermarket parts in auto repairs, violating consumer fraud laws and that, further, using those parts did not restore the automobile to its pre-crash condition, resulting in a breach of contract.  Although the award was reduced to $1.05 billion, the appellate court left the decision in favor of the plaintiffs standing.

Such rulings have caused most insurers to avoid aftermarket parts, allowing the automakers to regain a captive market, and also eliminating an opportunity for insurers to save money and pass those savings on to the policyholders.

Not long after the State Farm verdict, Public Citizen, a consumer advocacy group founded by Ralph Nader, condemned the ruling: with no basis in fact, the courts had created a virtual monopoly for OEMs in crash parts.  Worse, that monopoly was not going to serve, but rather cost, the consumer.

Still, there are a few bright spots.

In February 2003, three class action suits involving aftermarket parts-one each in Ohio, Washington state and Florida-were overturned or dismissed.

The Institute for Highway Safety did further studies, too, and, in March 2000, concluded again that the source of cosmetic crash parts has nothing to do with the car’s subsequent crashworthiness.  The test involved a 40-mph crash with identical 1997 Toyota Camry’s one with OEM cosmetic parts and one with a CAPA-certified hood (the only part originally thought to possibly require OEM replacement).  The CAPA-certified parts performed identically to the automaker parts in every significant way, reports the Insurance Information Institute.  As a result, CAPA is hoping its new term-“functionally equivalent”-will be more effective in explaining the parts’ performance than the old term used in state and local laws, “of like kind and quality.”

It is likely, however, that insurers will be wary of using aftermarket parts in the near future, unless more judgments are overturned.  Or until there is legislation clearing the way for aftermarket parts.

CAPA has produced model legislation that was introduced by the National Council of Insurance Legislators in 2002.  However, it was tabled until winter, 2005, meaning the status quo will remain at least until then.   Were it to be passed, CAPA says, the public would be protected both from an expensive monopoly and any chance of substandard parts.

Your Roommate Wrecks Your Car – Who Pays What?

Posted on by steve hom

If your roommate borrows your car and causes an accident, who pays what? If you both have auto insurance, your insurance will pay first and you’ll be responsible for your deductible. Your auto insurance policy insures your vehicle plus you, any relative, and anyone else using your car if the use is reasonably believed to be with your permission.

On the other hand, if your roommate causes an accident that results in serious bodily injury and property damage to another person, the actual driver’s policy will cover the bodily injury liability and the car owner’s liability covers property damaged caused by his or her car. As owner of the car, your liability insurance also covers the cost of your legal fees in the event you are sued, but if your liability limits are exceeded, the courts can attach your personal assets, such as your home, to recover damages. Liability coverage will not pay for damages beyond the limit for which you are insured.

If you lend your car to a roommate who does not have insurance, you are opening yourself up for trouble. If the damages your friend causes exceed your insurance policy limits, the injured party can come after you for medical and property damage expenses.

What if your roommate drives your car without your permission? You’re likely not to be held responsible for the damages because your roommate borrowed you vehicle without your knowledge. In this case, your roommate’s insurance will kick in first. If your roommate isn’t covered, you will need to use your collision insurance to cover the damages to your vehicle, and your liability coverage will cover damage to other’s property. Unfortunately, the insurance company will assume your roommate has permission to use your car unless there are clear indications that you denied permission or there are extenuating circumstances, such as a drunk friend takes your car without your knowledge.

If your car is stolen and then involved in an accident, you will not be held responsible for damages done to other people and their property, but you will probably have to use your collision insurance to pay for the damage to your car. In the unlikely event the thief has auto insurance, his company will not pay for his criminal act.


Regardless of the scenario, it is wise to understand your insurance policy and exactly what it covers and when. Just as important, exercise common sense when loaning your car to roommates, friends, and relatives.